By the end of 2019, the number of pension accounts with voluntary contributions amounted to a little more than 40,000, and the amount of all voluntary savings was around 2 billion tenge. The positive dynamics of accounts and savings growth rather points to the fact of lack of interest in this product.
There are a number of issues in a situation that affects depositors, such as taxation, less favorable conditions compared to deposits, etc. It must be recognized though no one is particularly working on development and promotion of the system of voluntary pension savings.
The unpopularity of this product lies in the JSC UAPF’s passive effort to attract investors to the voluntary savings system.
The UAPF’s position can be justified by a busy schedule at the moment and settling the issues of the mandatory contribution system, but we assume it will not be up to that in future either.
Voluntary accumulative pension funds have not and, most likely, will not appear in Kazakhstan although there is an opportunity for this.
The dynamics of deposits in the Kazakhstan banking system as a whole testifies not only to the desire of the population to save, but also to the availability of free resources for savings.
It is useless waiting the savings to grow without active participation of the Ministry of Labor and regulator, as well as stimulation the voluntary system.
The solution is very simple: it is necessary to use professional help. We are talking about life insurance companies (LICs). LICs are the pension funds’ competitors, which are as good as pension funds and sometimes even be ahead in terms of stability and reliability. They are the largest institutional investors extremely interested in long-term investments like pension funds.
Similarity between LICs and pension funds lies in the nature of business. The cycle of life insurance products is longer than that of pension funds; it begins at birth and lasts throughout a person’s life. A long product cycle creates the basis for a deeper financial and actuarial planning of activities and prudent asset management.
The LIC activity is distinguished by a number of advantages:
- LICs independently manage insurance assets without enlisting the services of trustees; prudential regulation and relatively small volumes of assets taught LICs to effectively manage investments individually;
- Unlike the more capitalized participants, LICs conduct a more flexible investment policy using all the advantages of small players;
- Funded pension system is an area in which LICs have been working for over 15 years;
- Life insurance is one of the most monitored businesses by the regulator, which means it is transparent.
LICs’ sales over 10 years have increased by more than 9 times, insurance premiums amounted to about 197 billion tenge in 2019, and the capitalization of assets of life insurance companies increased by more than 1200%, to 440 billion tenge. LICs will account for the bulk of the entire insurance market assets and total insurance premiums in the next 10 years.
The fundamental advantage of LICs over UAPF is the availability of a harmonious distribution network. The regulator’s requirements also apply to agent networks and branches which allow LICs to build strong regional offices that can sell complex financial products.
They proved it on retirement annuities, the sales of which amounted to more than 65 billion tenge by the end of 2019. According to subjective feelings, LICs lure every depositor whose pension savings allow him to pay a retirement annuity agreement from the funded pension system. This indicates a high level of customer service.
UAPF is not specifically engaged in the promotion of the voluntary system.
It is obvious that the voluntary contribution system will not work in full force without creating incentives and competition.
Thus, it makes sense to give life insurance companies the right to collect voluntary pension contributions.
The access of trained and motivated players under existing conditions is the only way to push the population to form retirement savings.
The scheme with voluntary savings in LICs has several advantages over a single fund:
- First of all, LICs will offer existing customers who are familiar with complex financial insurance products to create savings;
- They will provide a stable and long-term rate of return on assets, and competition will set it at a level higher than in a pension fund;
- LICs will provide depositors with a life insurance policy, that is, in addition to savings the depositor will also get insurance coverage;
- The activities of LICs are clearly controlled by the regulator while there is no prudential regulation for JSC UAPF;
- LICs will offer the depositor to participate in the insurer's profit. Accumulative life insurance products with the participation in the insurer’s profit are common products in the world. The voluntary pension contributions as a funded product without an insurance component may also have the option of participating in profits;
- LICs will provide depositors with many options for withdrawing savings that a voluntary fund will not be able to provide, for example:
- Conversion of savings into lifetime payments regardless of their size;
- Conversion of savings into an annuity agreement in favor of the heirs;
- Inclusion of voluntary savings in a pension annuity upon reaching the appropriate age;
- Term payments under the pension fund scheme, etc.
The scheme with voluntary savings in LICs is more harmonious and flexible for depositors in comparison with other accumulation schemes.
The depositor forms voluntary savings the purpose of which can be determined at the right time, not bound by the obligations inherent in housing, educational and insurance programs.
When hour X arrives, the depositor has the right to decide how to use his pension savings, and then he can send them to housing, educational and other programs.
The depositor can convert his assets into a simple annuity agreement in favor of his children and grandchildren. The savings will be divided between the heirs and paid in a certain order. JSC UAPF cannot offer all this.
The elimination of competition in the market of mandatory contributions has serious justification; the UAPF monopoly in the market of voluntary contributions, however, is meaningless. Creating competition without much hassle will contribute to the entire funded system further development.
The Ministry of Labor and regulator need to understand that this proposal is beneficial to the state in the first place, as the government will not have to stimulate the population to create voluntary pension savings.
Life insurance companies will do this on their own, just as they promoted pension insurance in the country from scratch once.
Photos are from open sources.